I am aware of that part, yeah. It's a shitty change, one hundred percent, and I'm glad to see folks like Wyden trying to unwind it. At the same time, I've owned small software businesses before, and I've started/not started new ones based on whether I thought it would work out. Where I am unclear is what sorts of business plans, on day zero, would be suddenly nonviable when it was viable before, so suddenly overwhelmingly difficult, as to cause such discouragement.
Is there a good chance of recategorization pushing a very marginal business off the cliff? Sure--that Twitter thread, where there are enough details to read in, has a lot of examples of marginal businesses having trouble (mostly because of not being able to plan in the change, which really sucks). But you don't have that on day zero, and going in with the aim to be that very marginal business is probably not the best of ideas. It's not a day-zero problem, and I am struggling to see where a small business with a business plan that was previously worth executing on is now not worth it because of this change.
It fundamentally changes the cost structure and investment risk profile of business plans without changing anything about the intrinsic economics of the business by requiring much more capital to achieve the same outcome. A perfectly reasonable business plan can suddenly become non-viable if there is a huge new overhead to doing business. Suddenly needing to pay $1M to the IRS on "profit" for a company that is barely making money is rather large change to the financial assumptions that make the business viable.
Affected small businesses suddenly need to increase revenue or cut costs by 20% just to keep their business solvent. Most small businesses do not have the structural elasticity or capital reserves to absorb that, nor do many business plans. In the very long term it notionally all evens out but most small businesses don't survive that long and these large new costs of doing business will reduce the survival rate even further.
> imagine in year 1 you grossed 100k, spent 200k on salaries, but the new irs rules say you owe taxes on 60k of profits.
For a clearer picture on this it’s helpful to include the actual tax amount. With a corporate rate of 21%, the tax would be about $12K.
Now that’s not zero, but it better shows the actual cost born in year one under this plan.
The later years are important as well. As profits continue to flow in, the rest of the cost can be deducted from it. So it doesn’t disappear.
Though you do lose a bit from the nature of present nominal being inherently worth more than future nominal amount. With todays higher rates, that’s an even larger factor.
Right, this is exactly why I'm confused about the all-is-lost framing of this. $12K isn't nothing. It's a pretty shitty thing to have drop on you and I think it should revert. But if you're starting a software business that isn't a solo shop--so you have hundreds of thousands of dollars in payroll--I would expect a $12K difference to not be the needle-mover between "start a business" and "don't"; we're not talking a hot dog stand here.
I understand where you’re coming from but the thing to understand is: most startups are incredibly marginal to begin with. If you tilt the field such that the entire distribution is now ~5-6% lower expected value for any given outcome, you can easily wipe out 80%+ of the startups that might’ve been “worth trying” but don’t make any sense now on a risk-adjusted basis. The entire asset class can become unfundable because the same money taking the same level of risk simply generates more returns elsewhere
Are we talking "startups" or "small businesses" here? I could see this blowing up startups for sure, but the conversation was about small businesses and I'm not sure I see the connection there. In my conception of the universe, you're not rolling out multiple hundreds of thousands of salary when you're hanging out your small-business shingle. You might grow to it, but that'll be over a long period of time.
Having to amortize salaries mean that a freshly starting company has to include any salaries paid as (software devs salaries)4/5(corporate tax rate) extra thing to budget - if they don't have access to necessary reserves up front, it might be enough to turn a marginal business out from starting at all.
Is there a good chance of recategorization pushing a very marginal business off the cliff? Sure--that Twitter thread, where there are enough details to read in, has a lot of examples of marginal businesses having trouble (mostly because of not being able to plan in the change, which really sucks). But you don't have that on day zero, and going in with the aim to be that very marginal business is probably not the best of ideas. It's not a day-zero problem, and I am struggling to see where a small business with a business plan that was previously worth executing on is now not worth it because of this change.